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How do Consumption and Asset Returns React to Wealth Shocks? Evidence from the U.S. and the U.K

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Abstract

In this work, I analyze the response of consumption and asset returns to unexpected wealth variation. Using data at quarterly frequency for the U.S. and the U.K., I show that: (i) while housing wealth shocks have a very persistent effect on consumption, financial wealth shocks only have transitory effects; and (ii) similarly, unexpected variation in housing wealth delivers a reasonably persistent response of real returns while financial wealth shocks have just a temporary effect.

Suggested Citation

  • Ricardo M. Sousa, 2010. "How do Consumption and Asset Returns React to Wealth Shocks? Evidence from the U.S. and the U.K," NIPE Working Papers 14/2010, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:14/2010
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    1. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-34, May.
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    5. Martin Lettau & Sydney Ludvigson, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, June.
    6. James Banks & Richard Blundell & James P. Smith, 2002. "Wealth Portfolios in the UK and the US," NBER Working Papers 9128, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2015. "Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-varying Vector Autoregressive Model," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 176-196, August.

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    More about this item

    Keywords

    financial wealth; housing wealth; consumption; asset returns.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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